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Ernst & Youngs Involvement with Lehman Brothers Downfall

Katie Mahon

24 September 2015

One of the largest investment companies in the world suddenly vanished, filing
bankruptcy that impacted our world today. Lehman Brothers were at the top of the charts; or
at least that is what was portrayed in the media. The white collar crime that lost hundreds of
billions of dollars has been inexistent, but still an unforgettable tragedy that effected the lives
of so many. The tragedy continues as cases come to their final decisions, including the
involvement of Ernst & Youngs accounting team.

The questions that must be resolved are what factors led to the Lehman Brothers
financial crisis? What was Ernst & Youngs involvement and how did they cease to hide the
facts behind Lehman Brothers downfall? Answers to these issues should assist us to further
understand the causes and effects behind the largest bankruptcy in history.

Lehman Brothers were one of the five largest U.S. investment companies, however on
September 15, 2008, the company filed for bankruptcy. The shocking financial disaster not
only took a toll on the employees of the company, but also on the financial markets, investors,
families, and the global economy. Investors and government authorities were being misled for
years on how well the company was actually doing, leaving them with little sense of how to
overcome the financial crisis. (Kroft, Jacoby, Karzis, 2012).

The unpredictable collapse occurred because of several cover-ups and false


information that was presented by Lehman Brothers along with the participation of one of the
top accounting firms, Ernst & Young. With the assistance of the accounting firm, Lehman
Brothers were able to cover up any issues that had been occurring for at least a few years.
The concerns included the significant amount of assets the company truly had, with over $600
billion in assets, they felt on top of the world. Unfortunately, that did not include the amount of

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company debt the company was experiencing, which by 2008 was also over $600 billion
(Investopedia, 2014).

Other factors were expressed later in a CBS 60 Minutes, interview with Anton
Valukas, U.S Attorney for the Lehman Brothers report. The truth that came out of the report
was that Lehman Brothers overconfidence with the real estate markets led to a huge amount
of loss when the markets began to collapse, as well as the borrowing of too much money in
order to make deals and the Lehman executives manipulation of financial reports to keep
investors interested (Kroft, Jacoby, Karzis 2012).

These aspects all concluded with the involvement of Ernst and Young, by allowing the
executives to manipulate these reports and not doing anything to stop it. Ernst and Young
obviously did not show any type of seniority over the Lehman Brothers by signing off and not
auditing millions of fraud reports. With all of these issues and secrets built up, the company
found itself hitting rock bottom.

Ernst & Youngs accounting team was in charge of auditing and overseeing the
investment companys reports. The accounting firms involvement demonstrated the
allowance of covering up Lehmans misleading financial report. The firm knowingly approved
the removal of billions of dollars in debt within Lehmans quarterly reports (Freifeld, 2015). By
affiliating with this scandal, Ernst & Young found themselves in a massive accounting fraud,
leaving them with several white collar cases throughout the past seven years. According to
the author of Sustainability and Governance, Cheryl Lehman said that Ernst and Young was
accused of issuing an unqualified opinion on the financial statements of Lehman when it was
allegedly aware that the bank was using an accounting maneuver known as Repo 105 to
make itself appear healthier than it really was (Lehman, 4). This demonstrates the criminal
fraud that Ernst and Young participated in with the Lehman Brothers downfall.

This past spring, Ernst & Young has settled to pay $10 million for the auditing scandal
associated with Lehman Brothers during the investment companys existence. The case
declared that Ernst & Young assisted in deceiving investors with Lehmans misleading
financial reports (Reuters, 2015). The lawsuit was filed in 2010, suing Ernst & Young for over
$150 million in money earned from executing business with Lehman Brothers (2015). Recent
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development of the case has found the settlement of $10 million did not include the $99
million Ernst & Young will pay to investors for damages caused by the crime (2015). Luckily
for Ernst & Young, the criminal case concluded that they were not responsible in any way for
the collapse of Lehman Brothers.

With such power should come a high sense of integrity, but unfortunately Lehman
Brothers were unable to succeed because of the greed around them. Being such a well-
known and established investment company partnering with a top accounting firm, nothing
seemed like it could go wrong. The criminal case was a shock that will never be forgotten,
especially to the ones primarily affected by the downfall. Through personal experience,
watching family and friends suffer through the losses of millions of dollars invested into
Lehman Brothers, penalization should be a factor for not issuing the matter before it was too
late.

Thinking about this economic crime makes me wonder about the ethical and human
values rather than what may make the most profit for a company. Lehman Brothers had
several reasons for the 2008 collapse and after further investigation Ernst & Youngs
involvement does not seem all that innocent. By allowing misleading financial reports to be
approved, the firm demonstrates unlawful actions. According to Lehman Brothers Code of
Ethics from 2004, they aim to have, Full, Fair, Accurate, Timely and Understandable
Disclosure (Lehman Code of Ethics, 2004). In other words, all employees and directors must
comply with preparing an accurate and fair analysis of all financial reports. Nonetheless,
Lehman Brothers broke their own code of ethics through the scandal during the last few years
of the companys existence. Ernst & Young may also be a culprit of disclosing wrongful
financial reports for Lehman Brothers, leaving their firm reliable for immoral actions.

Aside from breaking the accurate disclosure section of Lehmans code of ethics, they
also revealed the violation of Fair Dealing, also known that no individual should take unfair
advantage of anyone through manipulation, concealment, abuse of privileged information,
misrepresentation of material facts or any other intentional unfair dealing or practice,
(Lehman Brothers Code of Ethics, 2004). Lehman Brothers proved to violate the Fair
Dealings code by providing misrepresented dealings to their clients and investors. This led to

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the outbreak of the crime, which in turn caused so many employees, investors and families
suffering the loss of billions of dollars.

As all of the facts begin to unfold about the Lehman Brothers and Ernst & Youngs
involvement with the scandal, it helps to ponder what the true intentions were? Obviously
breaking Lehmans own code of ethics in several different ways was never their intention, but
the fact of the matter is some form of punishment was vital because of the criminal conduct.
Even though seven years have gone by and our global economy has suffered through the
hardship of a top investment company filing for bankruptcy, we can only hope that the future
of the financial industry will be better, safer and stronger, given current regulatory efforts.

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Bibliography

Fortune, (2015). Ernst & Young settles with N.Y. for $10 million over Lehman auditing.
http://fortune.com/2015/04/15/ernst-young-settles-with-ny-for-10-million-over-lehman-
auditing/ [Accessed 20 September 2015].

Freifeld, K (2015). Ernst & Young Settles with N.Y. for $10 million over Lehman
auditing [online]. Reuters UK. Available at: http://uk.reuters.com/article/2015/04/15/uk-
ernst-lehman-bros-idUKKBN0N61SO20150415 [Accessed 13 November 2015]

LEHMAN BROTHERS CODE OF ETHICS. (2004). Available at


http://som.yale.edu/sites/default/files/files/LBH_Inc_Code_of_Ethics_2-17-04.pdf
[Accessed 20 September 2015]

Lehman, Cheryl (2015). Advances in Public Interest Accounting: Sustainability and


Governance. Emerald Group Publishing

Lehman, C., Tinker, T., Merino, B. and Neimark, M. (2005). Advances in public interest
accounting. Amsterdam: Elsevier JAI.

Kroft, S., Jacoby, J. and Karzis, M. (2015). The case against Lehman Brothers,
Cbsnews.com.
http://www.cbsnews.com/news/the-case-against-lehman-brothers-19-08-2012/
[Accessed 20 September 2015]

Staff, I. (2008). Case Study: The Collapse of Lehman Brothers. Investopedia.


http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp
[Accessed 20 September 2015]